Whether you act as a director in an official capacity or take a director-like role without the title, there can be serious consequences for the unwary.
The problem is that, as far as the law is concerned, your responsibilities are the same whether you have the title of director but not the actual role, have the role without the title, or have both the role and title.
Directors are not just those who are registered as directors at Companies House. They are anyone who acts as a director, whether they are called directors or not. They include directors who have been appointed by the company but never properly registered. They also comprise those whom the law calls ‘shadow directors’: those who give directions and whom the company generally follows. These might commonly be business advisors, senior managers, ex-directors, shareholders or investors.
If a company runs into financial difficulties, then in certain circumstances, the directors can be held responsible and sometimes have personally financial liability. For more details read Directors’ responsibilities in times of financial trouble on our website.
The three groups who are most at risk are as follows:
Directors in name only
It is quite common for a long-standing employee to be offered a directorship. From the company’s point of view, this makes sense: it’s a way of incentivising important employees without having to increase their pay as much as would otherwise have been the case. But, from the employee’s point of view, this can be dangerous.
Many such people say that, apart from the title, nothing much else has changed: they don’t actually get involved in running the company and are often not given full financial information.
Advice: if this is you, demand to be kept fully informed and be involved in decision-making; otherwise, it’s best not to be a director.
Business Advisors doing more than advising
The position should be that advisors advise the directors and the directors direct the running of the company. The dangers come when the advisor starts making business decisions themselves. It seems to make sense: if the advisor is trusted and their advice generally followed, why not allow them to simply make decisions and bypass the directors?
However, this then opens them up to being deemed a director and, with it, all the legal responsibilities.
Advice: know the difference between advising and directing and make sure you always stay on the right side of the line.
Investors taking an active role in running the company
In these days of tight finances, many SMEs are borrowing from friends, relatives and private investors instead of banks. A sensible investor will take an interest in the company to ensure that their money is being used properly and is likely to yield a return. But, there’s a difference between taking an interest, and even imposing certain conditions, and actually making decisions about how the company is to be run.
Advice: your position is similar to advisors: make your conditions clear and then allow the directors to direct without doing this yourself.
For advice on the roles and responsibilities you may have as a director call Gary Cousins on 0845 003 5639 or email Gary here.